June 30, 2016
Unconditional passing grades were received by all but one U.S. bank in the latest round of Federal Reserve stress tests. Morgan Stanley, which passed the first quantifiable part of the stress test last week, must refile its capital plans by 4Q 2016 “to address weakness in its capital planning processes.”
American subsidiaries of two European banks, Deutsche Bank and Santander, did not pass Federal regulators’ second round tests, which measure more qualitative variables. Last week, the Fed indicated all 33 big U.S. banks would be able to make it through a recession and still maintain adequate financial buffers.
Institutions go through simulated tests to see how they’d fare against different catastrophic conditions, such as steep interest rate hikes or unemployment, or an equity market crash. The tests measure if banks have sufficient capital, liquidity, management controls and other safeguards to protect them from failing.